Buried deep within Lenzing Aktiengesellschaft's Q1 2024 earnings call transcript (LNZNF) lies a subtle but potentially explosive detail. While the company paints a picture of resilience in the face of a "lacking market recovery," attributing their better-than-expected performance to the efficacy of their "holistic performance program," a closer examination reveals a starkly different reality. The seemingly robust performance of their pulp division, responsible for a significant chunk of Lenzing's revenue, is heavily reliant on a non-operational income source: the sale of CO2 certificates. This dependence on a finite, regulatory-driven revenue stream raises serious questions about the long-term sustainability of their business model and masks a potentially precarious position within the struggling generic fiber market.

On the surface, Lenzing's Q1 2024 earnings call presents a narrative of cautious optimism. Revenue has increased, EBITDA has significantly improved, and free cash flow has been positive for three consecutive quarters. They tout their performance program, with its focus on sales growth, cost efficiency, and free cash flow generation, as the driving force behind these positive results. However, a careful analysis of their financials reveals a dependency on the sale of CO2 certificates, particularly within their pulp division.

Pulp Division: Riding the CO2 Wave

The Q1 2024 transcript reveals that pulp revenues account for 24% of Lenzing's total revenue. Furthermore, the CFO, Nico Reiner, explicitly states that the sale of CO2 certificates positively impacted the pulp division's profitability by approximately €41 million.

This raises a critical question: what happens when this non-operational income stream dries up?

Reiner himself acknowledges that Lenzing currently enjoys an "oversupply" of CO2 certificates, accumulated over the years, and estimates a reserve of over 1 million certificates. However, he also points out that the current regulatory framework governing the allocation of these certificates expires at the end of 2025. Beyond 2025, the future of CO2 certificate allocation, and consequently this revenue stream, remains uncertain.

The Underlying Vulnerability

The dependence on CO2 certificate sales obscures the underlying vulnerability of Lenzing's pulp and, by extension, fiber divisions. The company's assertion that they "assume stable demand in pulp" appears questionable when factoring out the non-operational income from CO2 certificate sales. The inherent uncertainty surrounding the post-2025 regulatory environment for CO2 certificates amplifies this concern, casting a long shadow over Lenzing's optimistic outlook.

Further adding to the intrigue is the conspicuous lack of details regarding Lenzing's actual pulp sales performance. The transcript mentions pulp "revenues" but avoids disclosing specific sales volume figures. This lack of transparency raises questions about the true state of their pulp business, independent of CO2 certificate sales.

A Looming Fiber Crisis?

Adding fuel to the fire is the context of the overall generic fiber market. Lenzing admits that the relevant markets are still struggling, with particularly weak generic viscose prices. The CEO, Stephan Sielaff, even states that generic viscose manufacturers are "under pressure" at current price levels. Despite this, Lenzing insists on a "cautious outlook on the generic fiber market development," while simultaneously projecting "further improvement of [their] top line." This apparent contradiction fuels the suspicion that the CO2 certificate sales are artificially bolstering their performance and masking the true extent of their exposure to the volatile fiber market.

Hypothetical Scenario: The CO2 Crutch

Let's assume Lenzing's pulp division generated €168 million in revenue in Q1 2024 (based on the 24% revenue contribution to the total revenue of €658 million). If €41 million of that revenue came from CO2 certificate sales, then the actual operational revenue from pulp sales would be €127 million.

This hypothetical scenario suggests that Lenzing's pulp business might be weaker than perceived, particularly if extrapolated over the upcoming quarters and into the uncertain post-2025 regulatory landscape for CO2 certificates.

Conclusion: A Silent Storm Brewing?

Lenzing's "silent revolution" of relying on CO2 certificates might be a shrewd short-term strategy to weather the current market storm. However, their dependence on this non-operational income source is unsustainable in the long run. The looming expiry of the current CO2 certificate regulatory framework in 2025 exposes the inherent fragility of their strategy. The lack of transparent data regarding their actual pulp sales volume further deepens the mystery surrounding their pulp division's true performance. This raises a critical question: is Lenzing's "holistic performance program" truly driving their better-than-expected results? Or are they masking a looming fiber crisis with the ephemeral crutch of CO2 certificate sales? The answer, hidden beneath the surface of their optimistic narrative, might be more concerning than investors realize.

"Fun Fact: The global textile industry produces more greenhouse gas emissions than international flights and maritime shipping combined. This highlights the crucial role of sustainable fiber alternatives like those produced by Lenzing in mitigating the environmental impact of fashion."